NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

We're thrilled to have NCR with us at the Bank of America Technology Conference. And we have Mike Hayford, the company's Chief Executive Officer. So Mike, thanks so much for being with us.

Thanks, Ana.

Okay. So let's dive right into it. So I think the biggest topic with regard to NCR is it's well known that you're in the process of separating into 2 public companies. So on the one hand, a retail, hospitality and digital banking-focused company and then something that's referred to as ATMCo, but that's your self-service banking and the payments on the network, including the Cardtronics business. But before we get into a discussion of the separation process, could you take a step back and describe the strategic rationale for the separation?

Sure. Yes. So I mean I'll start with the concept in terms of the go-to-market and how we operate today, which we're literally in the 3 lines of business for banking. We're in hospitality and retail. And we deliver software products. We deliver services. We deliver hardware. And we're literally doing it all over the globe. And so it's -- I'll start with it's a complicated story. I appreciate everybody trying to understand us and where we're going. And as we talk about our strategy, where we're at and the brand and the power of the brand, it really does work around the globe for our customers. And our customers have been very supportive over the last number of years. We've had a lot of success improving our customer sat and reacting to us and actually picking up a fair amount of business and market share. But as we look going forward in terms of how do people view us in the investment community and how do they understand our company and our business, we said we really need to simplify the story. And as we started to look through it, we kind of came down to 2 lines of business. So on what I call RemainCo NCR, it's really a SaaS software-based business, whether it's commerce, retail and hospitality starting to kind of morph together, software POS, POS software-driven business. And then on digital banking, it's a software platform business to drive digital banking for banks. But they're both very software oriented, and then they grow off of those software platforms. And then the ATMCo, obviously, a very unique product. It's global. We're -- we've been the chip share leader for 5 years in a row, and we're all over the globe. And when you look at the dynamics of that business and where we sat and said, it's kind of a different investment thesis, it's a very, very stable business. It's driven by the need and use of cash around the globe, which is still growing. Even though electronic transactions continue to outpace growth, cash in the market, cash in circulation is actually growing year-over-year. And we continue to see that in some of the markets, still a strong player in the payment side. But that need to have that capability in a bank is still very, very strong. It's an investment in digital, and then it's an investment in an ATM or self-service channel. So we decided to pull that out and really focus on that. It makes understanding what that ATM business is really doing. We believe we'll be the leader again in chip share in 2023. We're transitioning to a subscription model. So it's going to be a high recurring revenue stream. It's a very, very stable rev all over the globe, generating very strong profit and very strong cash flow. We expect that we'll have a dividend attached to that. So if you think about the thesis for investing in that business and where it's at stable growth, we say mid-single digits. We think as it continues to grow in subscription, that's going to maybe even drive a little bit more growth because it's not just the shift to subscription when we do ATM service, it actually unlocks about 2x of the revenue stream. So that has proven, as we've seen it the last 18 months, to be quite successful. But that entity, stable growth, very strong profitability, stable cash flow, dividend, literally #1 chip share at ATM, full-service ATMs, #1 in surcharge-free network, the Allpoint network. We believe we're the #1 and 2 in service. And on RemainCo, RemainCo SaaS-based software, macro trends for growth, which will drive higher growth over time, very, very solid customer base. And then taking that to next gen across the board, we think that will be a high single-digit grower with a lot of potential to grow in the macro trend. So 2 different investment thesis, pulling apart has made it easier for investors to understand it. And the reaction we've gotten so far as we've been on the road after the announcement is people start to appreciate the ATMCo a lot better than buried under NCR today and are excited about the self-checkout software SaaS businesses.

Okay. That's a great introduction. Thanks. So before we dive deeper on the opportunities, let's maybe start with some of the pushbacks that you might hear from investors. So some of the challenges facing each business. So we start with the retail, hospitality side. So I guess the first would be just the macro weakness, especially in retail, things like store shutdowns from factors like continued secular trend in online shopping, even things like the recent increase in kind of theft and shrinkage that retailers are seeing. How do those factors impact you or that business?

Yes. I mean a lot of those macro trends -- so we serve physical retailers, physical restaurants in hospitality side and then help them morph into the digital side, right? So we provide the digital capability of the platform. Everything is tied to point of sale and then how do you add components on top of that. We had things like rewards and loyalty. We add the front end glass. We can order online, do like a private-label Instacart. We have a product that does that, driving efficiencies with self-checkout using some of the new technologies to be -- take the data. We keep all the data off of a register in retail or in hospitality. Historically, we've used that to compare. And more and more, we use that to provide analytics to do predictive analysis even on theft or where they have to worry about in-store theft or shrinkage. So in our business model, I'll tell you those factors haven't been per se negative. What they drive is investment in technology because technology is the way to really combat that. And if you're a physical retailer, you need to get into a blended model, a multichannel model. Most of the technologies they're using are siloed. And so we provide NCR Commerce platform to allow them to integrate the channel. So how do you shop today? Historically, you go to point of sale. Everything gets checked out there. Now you have self-checkout. Now you can check out in the lanes. You can buy online. You can pick up at the store. You can have it delivered. So all those things are driving spending. We think there's an imperative, particularly in retail, to renew and refresh your core technology, your point of sale to allow that. And that's really what we hear from the marketplace from our customers, the need to continue to invest to really address some of those macro trends you talked about.

Yes. Okay. And so on the hospitality side, I think one of the things that investors are aware of is kind of new competition that's come in to the kind of restaurant space, especially in the small business side. How is that impacting you guys?

Yes. So hospitality is -- and I'll just start with -- so it's this roughly $1 billion business for us. It's about 3/4 enterprise, enterprise being large table service restaurant chains. It's the QSRs, the quick service restaurants, the chain. It's a global business. It's a scale business. And then the other 20% to 25% is SMB. So maybe -- and we do better and are more focused on restaurant group. So maybe a 10-restaurant group that serves table service restaurants in the marketplace because the complexity of what they need, the information on the reporting, the ability to load up all their data in the cloud and the analytics on it is more important. So servicing a coffee shop or a yogurt shop, there's a lot of players that come into place, and we've seen a lot of those over the last number of years. We started to see some of those maybe be a little more challenged. But their access to capital is kind of drying up, and they haven't been profitable, and they don't have the scale to compete. We've had a couple of big competitors who have done well. Toast is the one that is very visible out there, but really just competing in the SMB space. Our team has done a nice job of rolling out our Aloha Cloud product, which has the same capabilities, the in-store handheld, ability to have the integration with online ordering. And in terms of competitiveness, we've been able to hold our own and actually grow that SMB market. On the enterprise side, it's a whole different business. So for example, we have enterprise clients who open up restaurants throughout the U.S. or we've had some open up in Europe. And the ability to literally take our point-of-sale software, point-of-sale hardware we use in a distribution center where we actually put all the hardware, software, ours as well as any other third-party palletization, wrap it and drop it into the store and install it and run it for them. And then we provide the support. And that's the level of complexity that a lot of our competitors haven't been able to get to. So in that space, we really haven't seen new entrants. We've had kind of the traditional players in there. We have a very strong installed base, and that business has actually been growing as well the last couple of years.

Okay. So while we're on this topic of the retail hospitality and kind of some of the headwinds, let's just kind of wrap it up with the macro discussion on these 2 businesses. So you did come off of a very strong first quarter with regard to the financial performance in those 2 segments. But obviously, we're in a fraud economic environment, inflationary recessionary factors. When we were all in the early stages of the COVID pandemic, NCR put out a really detailed breakout of its end markets to illustrate the resilience of the business. And I think it would be helpful to kind cover some of that because I think it also impacts the company's ability to weather tough macroeconomic conditions generally.

Yes. I think that's a great question. We did this in 2020. I think the market got very nervous. NCR serves physical entities. And again, we serve those entities, and we stretch the digital reach for them. But they are physical stores, physical restaurants, physical banks. And so what we tried to do back then is so -- it's a very diversified revenue stream. It's global, and it's in different industries, tends to be the larger scale, particularly in hospitality and retail. So in that area, I think when everybody was shut down and the SMB restaurants were struggling, so we actually aggressively helped SMB to do takeaway, right? That was kind of the business. But most of our revenue stream comes from the QSRs that do drive-through or the big-box retailers or the convenience gas stations that stayed open. It's quite diversified revenue stream, a lot of different entities. And so we talk about 62%, 63% recurring, which for us is literally contracted subscription revenue. But on top of that, a lot of our revenue repeats, which we don't really call are recurring, but it repeats every year. McDonald's going out and refreshing a store, that's not recurring to us, but it repeats every year. We have a fairly stable revenue stream with the McDonald's as they do a refresh. We have a stable revenue stream with the Walmart that we don't call recurring as they go and refresh point-of-sale or self-checkout devices. So the stability, the diversity of our revenue stream and it's -- we actually took a look in 2020 compared to the '08, '09 or even 2000 recessions and said, how much do we have at risk? And our business has shifted so much subscription software services that are recurring in nature. And even, as I said, on the hardware side, some of it's repeatable that our impact and our risk is quite a bit less today than it was even 10 years ago.

Okay. And then just staying on some of the kind of pushback topics, if we go to the -- what would be the ATMCo part of the business. So a decline in cash usage comes up all the time in investors' minds. But on the other hand, the devices you use, the software that you provide do a lot more than just sort of spit out cash so -- to people. So I just wanted you to address that concern that people have about the secular decline in cash usage and how that can impact your business.

Yes. I mean the secular demand is really -- the use cash versus electronic, right, debit, credit, using your phone to do electronic transaction. There's not really a decline in cash. So there's more cash pushed out in the market globally than we've had, and it's been growing the last couple of years. And as you've seen, like in Europe, some displacement and some turmoil, people revert to cash. I was just over in Europe last week. We were in Egypt. Egypt is still very high cash. There's a lot of ATMs. So I think that dialogue -- if I'm in New York, in Manhattan, I don't use cash. But if I go out in the rest of the country and go out around the globe, there's still a fair amount of cash. So the cash used to -- and then as you said, for our financial institutions, they still believe ATM deploying as a channel is very important to them. They use it for cash. A lot of the banks -- and you see even your bank, BofA, is using it in branches for cash withdrawal, cash deposits. They strip off the teller line because it's more efficient for them. They can get increased hours of banking in that model. A lot of movement towards ITMs. Interactive teller machines, what we call it, can do about 95% of what a teller does. So you can do a lot more transactions with that. People are deploying those in drive-throughs, replacing the tubes, so deploying those as a vehicle to provide a better service level for their clients and do it in a very cost-effective manner. So we've actually seen self-service. And you see our numbers that we anticipate for ATMs are very steady and stable, and we don't really see that changing a lot. In the Allpoint network that we have, it's traditionally been a cash-out network that we now do cash-in, and our customers love that because they set up small business deposit in those devices. We're doing bill pay there. You can go into Walgreens and do a bill pay, so you can add other capabilities. You can buy crypto. You can transfer funds. So there's a lot of other uses that people are starting. It's literally just an efficiency tool that FIs are using, and then we've extended that to, in some cases, retailers using them as part of the Allpoint network.

Okay. Final investor concern I would highlight is just what's been going on with the regional banks particularly in the U.S. and then banking and bank branch consolidation, so both bank consolidating but also the potential that bank branches are being shut down. How does that impact you guys?

Yes. So on the first one, so we've done a little stress testing. So we're very, very, very diversified in our revenue stream, both on the ATM side as well as the digital banking side. Digital banking is predominantly domestic. But we serve small community banks, credit unions, some regional banks, some big banks, and that revenue stream on an individual bank impact would be de minimis to us. And we looked at some of the banks that were at risk. Some of them gone out of business and others that are at risk that have not been out of the business, and it really will not be an impact to us. When you talk to bankers and you talk to even the regional banks, they don't view what's happened to some of the banks and actually this area as systemic in the banking environment. And they haven't had some of the issues that have been headline news for them, and they haven't stopped their spending. So we don't really see -- globally on the ATM business, 130 countries, again, very diversified revenue stream. And we just -- if a bank goes out here or there, there's some consolidation, it's just not going to impact our business in a material way. On the investment side, in the shifts of closing branches, I'd say it's more of a what is the banking strategy? What is the bank trying to do? Whether it's a community bank or BofA or a regional bank, it's all about moving customers to more cost-effective channels. So right now, there's a lot of investment in digital. We are the largest pure-play digital player out there with our digital banking. And so we don't see that slowing down. We see more and more functions being pushed to the digital channel. Historically, checking balances, paying bills. Now it's account opening. Now it's actually a lot of investment and managing relationship via digital channel. We've got a big investment in taking that digital channel and then integrating what you do in the brand. So we've signed up a number of large banks to rehabilitate the teller or their platform. So the branch experience, if any of you have been in a branch recently, the branch experience trails what you get on your mobile device or on your desktop device. So we're helping to bridge that. And we see that an area of continued spend. And then the next place that banks send you is to an ATM or again an ITM, which gives you an interactive experience. And so we continue to see banks deploying that. What banks are trying to do is save money where they have a footprint. So branches are being consolidated. And that's as much a physical savings or headcount savings. The services that we provide, the solutions we provide are really efficiency services, where it's digital banking on the one side or whether it's ATM self-service. So we kind of see where we play as being supporting bank strategy. The spending trends in the first quarter, you saw our banking side had a really strong start to the year. We simply haven't seen any diminishment of investment or spend, either digital or the ATM channel.

Okay. Good. So I'm watching the time because I want to make sure we have time to talk about the separation process and where you are in that. But if we could just wrap up in terms of the key opportunities drivers, what is the greatest opportunity that excites you the most, both on the retail, hospitality, digital banking side and then on the SpinCo side?

So on the SpinCo side, the ATM side, and I think this is a part, as we've talked about our strategy and our game plan, people look at it and go, wow, that's kind of an interesting business. And it's fairly straightforward. It's taken a dominant market position where we are today globally and transitioning that to a subscription, so ATM service. And it's not just about turning that into a recurring revenue stream. It's about unlocking what banks do internally themselves and giving us access. Again, the deals we're seeing are running about 2.5x more revenue over a 5-year span than our traditional selling hardware and break/fix services. So it's actually opening up a fairly large target addressable market for us. So think about it as ATMCo taking a business to say macro may be relatively flat. The number of ATMs being deployed around the globe in the next 5 to 10 years are relatively flat. And that's what we've modeled. But the ability for us to get a higher percent of the spend allows us to grow. They said mid-single digits, maybe even higher. We think that revenue stream will start to move from a 60%, 62%, 63% at spin, up towards 80% subscription. We think there's room for the EBITDA margin to grow even 400 or 500 basis points over the next 5 years as we get more scale and mass. So high recurring revenue, very strong margin, strong cash flow, dividend producer. And then quite frankly, in that space, we think it will be the global leader and not an area that we see the same level of competition we see on RemainCo. So again, when you sit down and talk about that, where it's positioned, it's not an ATM hardware company. It's a services-based company driving high recurring revenue streams. On the RemainCo side, digital banking, the macro trends in digital banking software base, we believe we have like the best platform, a very solid platform. It's very leverageable. It's scalable the way it's been built. It's why we probably drive more profit in that space than others. That is a market that we think we will be able to get up to mid-single digits, 13%, 14% growth. And we think the strategy that we're undertaking to provide channel integration for banks is exactly what they're trying to do. And so we see a lot of opportunities, positioned very well domestically, probably expand a little bit over in U.K. and Europe over time, but continue to be a leader. And then on CommerceCo, so hospitality and retail being a little bit similar, both underpinned by the NCR Commerce platform. It's a fairly straightforward strategy. So hold on to our clients on point-of-sale software. We're the leading player in the marketplace today globally, hold on to those clients. I call them the 3Ps, hold on to the POS clients, migrate them to the platform, migrate them to the platform, and then you have upsell opportunities. That's a little bit more plug and play. And we're seeing that with clients. We get them over there. And then we got a plan to add 3x on top of that revenue, and we think we're going to get there. And then the third thing is payment. So we've started to do that with SMB, hospitality. 95% of our SMB sales now include [ attach ] payment. And so adds revenue, adds margin, adds stickiness. We're starting to see that in enterprise hospitality and rolling that into retail later. We'll start with the point-of-sale strength that we have, move them to platform, which is our next-gen product, add payment. And then internally, we talk about something we have to monetize the data. We literally store data. Like every restaurant we have, we have all the data for years and years. What they see and using that data, they use it to do like literally everything they do to run the restaurant, and we have stores doing the same. And now we're starting to see -- take that data and then do some predictive modeling. So not just ran a campaign and what was the result, but I'm thinking about running campaign in this market and what do the analytics say might happen and help them be more predictive. We don't monetize a lot of our data today. We have a wealth of data that at some point we'll monetize. So on the e-commerce side, we're excited about the POS position we have. We're excited about moving the platform, adding payment and eventually monetizing some data. So that business, we think, has a lot of upside potential.

Okay. One of your biggest competitors just filed for bankruptcy. Is there any read-through for NCR? And is there an opportunity for you guys?

Yes. So the read-through question we get is anything happening in the banking market. We crushed it in the first quarter. We think we're going to do it really -- we actually -- Tim on the call -- so we have a -- we believe, long term, that ability to get the ATM service, high recurring revenue, have a subscription base and move the margin up is going to be a great product, eliminates quarter-to-quarter competing and eliminates the risk that at some point no one's going to buy this because you've got 7-year contracts and it drives higher earnings. We think the margin will continue to go up. So we've been doing that. It's created a headwind for us. And so this year, the more we accelerate the more headwind -- we're trying to accelerate. We're actually ahead of where we thought we're going to be at ATM service, but we're actually driving more sales and revenue. So we had a very strong start to the year. We think that's going throughout the year. We don't see demand. So the challenges that Diebold has had, we don't think are demand driven by the marketplace. We continue to see demand for our products. I think they've been struggling for a number of years, and it's just their balance sheet, and that's coming out of some of the things they did. And what it manifests itself in is in order to make -- pay their debt load, they've had to cut costs. Well, the cost they cut are service-related costs or product-related costs. And again, they're a great company, long-term historical company. But as they've tried to cut their costs, it impacts their relationship with the customers. So we've seen over the last number of years, and as you can imagine, it's accelerated the last few months, customers come to us and say, can you service our footprint? Because we decided to excel at service and say we're going to be the best service provider in the industry. We -- literally the last 3, 4 years, as we get rated by customers like BofA and JPMorgan and Wells and others, that's clearly the case. We provide better service than Diebold or Hyosung. We believe we have better equipment, and we, by far, have the best software stack. So we've invested and continue to grow. We don't see that changing with the macroeconomics, and we think there might be a little tailwind as you expect from the turmoil from some of the competition.

Okay. Also, in the recent news camp, so I think the company has been quite clear, even though you're in the separation process, and I think the last comment you made were that you expected to be complete in the early fourth quarter of this year. So effectively maybe about 5 months away that you -- the phone lines would be open for alternative transactions that could create more value potentially.

Yes, it's crazy. I had a CEO of a publicly traded company say we're open for enhancing shareholder value. So whether we say it or don't say it, we always are, right? Every company has to be -- every CEO has to pick up their phone and answer the phone. So we're driving towards the spin. We announced it last September. We believe we can get there early October. It's kind of what we're trying to get to. And the steps to get there, the filings we've done, our initial filing with the SEC, at some point, that would become a public filing. We think we're on track for that. We have to do a letter ruling from the IRS. We think we'll be able to get that. The go-to-market side, we've already done. We've been doing that for the last 5 years. So get the teams ready, vertically aligned, sales, support, service, product engineering, that's all done. Corporate side, we're working through, on schedule. So we're on track for our spin. And that's what we're committed to do. And we believe the spin will unlock value. We believe that where we trade today is undervalued in the marketplace. We believe ATMCo will be recognized as an attractive asset that we think it is an attractive company to invest in. And then we believe RemainCo SaaS-based business will have valuations that may be more appropriate to other SaaS-based companies in the marketplace. So we think that will unlock value, and that's what we're very, very, very focused on. We can control that. We're doing that internally going down the path, and we're on schedule to do that. Nonetheless, if somebody has a brilliant idea that will unlock value, we will listen. We've said that since we entered into this strategic process almost a year ago. And we've talked about it coming out of the announcement that we're going to do the spin that if something came up -- so as you can imagine, when you say that, whether you say it or don't stay it, I'm going to get calls about different parts of our business. So we continue to evaluate those. But I mean I'll tell you, Ana, the -- so controlling, getting to a spin we know we can do, we believe that unlock the value is meaningful. Otherwise, we wouldn't be going through this action. And so anything that comes over the transom has to say that is going to create more value for shareholders and put the position of the company or the companies in a better position long term than the path that we're on today. So as -- I'm surprised there hasn't been more noise, quite frankly, but those are -- it's just noise, and we'll continue to be open to any and all ideas, but we're going to focus on the spin.

Okay. So let me try to ask a question this way. So there was a news story that recently reported that digital banking could be for sale separately. If that were to happen -- and I would say that digital banking is probably the -- retail, hospitality is a very -- that there's industrial logic to that fit, right? And digital banking is a software-based business but obviously different end markets. So if you were able to sell digital banking separately, would the spin -- could the spin still happen and really just with the retail and hospitality piece and then the ATMCo piece? Or I don't know if you want to...

Yes. Well, so there's article about digital banking. But again, it could be about anything. It could be hospitality, SMB. It could be hospitality. It could be -- so I don't want to like over-rotate on digital banking in terms of pieces or things that people might be interested in. Again, at this point in time, we have a game plan. We have something we think will be creating value. Digital banking is a stand-alone business. It fits with the RemainCo because it's software based and it's going to be -- as you think about as an investor, we think the peer groups and the comps will be much more similar than if it had stayed in the banking side. So that's why it stayed in the RemainCo. In terms of timing on the spin, it depends, right? It depends on what would come to transom, what would be there. First of all, it has to exceed the hurdle of it's going to create more value than the risk of maybe detracting from a spin. Could you do it in conjunction? It would really depend on what is out there. So I wouldn't want to speculate on what that would be. I think we'd be very concerned about taking the path we're on and that's being focused on that. So anything we would do would have to fit into the -- unless you had like a big number for me, right? I mean everything is going to be relative to the value. So right now, I'd say [ down and spin ], if something comes up that maybe fits with that, that unlocks value before, after, at some point, we're always open to that.

Okay. Great. So with that, we're out of time. It's been fascinating conversation. I don't know if you have any -- I think it's a good place to end, but any closing comments on your part are welcome.

We've said this before, but I think what's been interesting as we've gone on the road after the spin, so the company is all there today under NCR. It's under the NCR cover. We have 5 different reported segments. And I think people look at it and they look at particularly ATMCo and say, well, ATM business doesn't have a lot of future. When we've gone out post announcement and sat down one-on-one with investors or potential investors and talked about the 2 businesses and got the focus on them, the reaction has been quite the opposite, a lot of interest at ATMCo, a lot of interest because it doesn't have as much competition. It's global, stable. They love the strategy in terms of shifting it to subscription. They love the fact that it's going to be a strong, steady cash flow provider. So that's been kind of interesting reaction we've gotten from the market, not exactly what we expected. But I think it's because people have to then look at the 2 in pieces. So it kind of ratified the thought that these companies might be better separated from an investment thesis, and we've actually been quite pleased with the response.

Okay. Awesome. Okay. Mike, thank you so much.

Thank you, Ana.